New Delhi, Mar 21 (PTI)  Moody's Investors Service today said non banking financial companies (NBFCs) will demonstrate broadly stable asset quality, but delinquencies could rise over the next 1-2 quarters as demonetisation adversely affects collections across asset classes.

It said the growth in loans against property has outpaced overall retail credit growth in recent years, but relatively loose underwriting practices, combined with intensifying competition, will translate into higher asset quality risk for this segment.

"NBFCs in India will demonstrate broadly stable asset quality, but delinquencies will likely rise over the next 1-2 quarters, as demonetisation adversely affects collections across asset classes," Moody's said in a statement.

Over the past three years, NBFCs have gained some market share in the origination of retail lending, on the back of faster growth exhibited by such entities when compared to the banks.

This is particularly the case when compared to public sector banks, which face significant challenges on their asset quality and overall solvency profiles, it said.

"Nevertheless, we expect that competitive pressures from the banking sector will remain intense as banks are increasing targeting of the retail segment to offset weakness in their corporate lending. In addition, retail lending, particularly housing loans, is more capital efficient for the banks," Moody's VP and Senior Analyst Alka Anbarasu said.

While the NBFCs' capitalisation levels are adequate with average Tier 1 ratios in excess of 14 per cent, capital generation will lag credit growth. Access to external capital will therefore hold the key in sustaining the NBFCs' growth momentum.

Moody's expects that the NBFCs' funding profiles will broadly remain stable, and funding costs should moderate gradually, given the reduction in systemic rates.

In addition, the NBFCs' profitability and capital, as well as funding and liquidity levels, will stay broadly stable.            

NBFC asset quality risk: short term delinquency rise after cash disruption, capital access and funding stability determine resilience. NBFCs should maintain broadly stable asset quality though short term delinquencies may rise due to disrupted collections; loans against property growth and loose underwriting heighten asset quality risk. NBFCs have expanded retail market share versus banks, but capital generation may lag credit growth, making access to external capital critical. Funding profiles should remain broadly stable and funding costs may moderate, supporting near term profitability and liquidity.